By Soham Chatterjee and Nivedita Bhattacharjee
BANGALORE/MUMBAI (Reuters) - Staff left India's second largest IT services exporter Infosys Ltd at an unprecedented pace in the last quarter, worrying its management and raising investors' concerns about its ability to win lucrative contracts even as it posted a higher-than-expected net profit for the period.
Retaining staff is a challenge for all Indian IT services firms, which rely on armies of young, mainly low-paid workers to remain competitive in an industry worth more than $100 billion.
Infosys, however, appears to be having a particularly difficult time with staff as it undergoes a restructuring aimed at lifting growth to match rivals including sector leader Tata Consultancy Services Ltd and third-ranked Wipro Ltd.
The attrition rate, currently bigger than its two rivals, is the highest ever seen and "more than we are comfortable with", Chief Executive S.D. Shibulal told a briefing after the company posted a 25 percent increase its net profit for the fourth quarter that ended March 31.
The company's annualized staff attrition rate stood at 18.7 percent at the end of March, the company said, up from 16.3 percent at the end of the same quarter last year and in line with the rate of staff exits in the previous quarter. Shibulal said the company was trying to retain staff through pay increases, promotions and other incentives.
"Clearly some of these moves are affecting relationships and client demand as they go through this transition," said Sam Mahtani, a London-based fund manager for F&C Indian Investment which owns shares in Indian IT firms, but not Infosys.
"They really need to bed down all the changes and give investors a stable ground so they don't continue to surprise investors negatively on a quarterly basis. They need to go through several quarters of building investor confidence."
Shares in Infosys, the most widely held Mumbai listed stock, rose as much as 4.7 percent soon after the earnings were announced, but gave up some of gains to trade 0.9 percent higher at 0540 ET in a weaker Mumbai market.
The exodus of staff and senior management gathered pace after Infosys brought back from retirement its founder N.R. Narayana Murthy to help revive its fortunes in June last year.
The company, once a bellwether for the IT outsourcing industry, has been underperforming its rivals in winning contracts from the United States in Europe in recent years as it focused on high-margin consulting and software services.
Murthy has vowed to boost growth over the next three years, partly through prioritizing the quest for big-ticket contracts.
Some senior executives, seen as CEO contenders, left after Murthy initiated changes that also ushered in his Harvard-educated son Rohan as executive assistant. His strategy also led to some jobs becoming redundant.
Before Murthy rejoined, some investors had faulted Infosys' strategy of choosing its chief executives only from its founding members.
Chief Executive Shibulal, one of the founders who said last week he would retire early next year, told the earnings briefing the departure of several senior managers had not affected the company's business.
Some analysts, however, said the overall high attrition rate would weigh on the prospects of Infosys, one of the pioneers of the outsourcing sector that lured tens of thousands of young workers by paying attractive wages and building campus-style facilities.
"The current attrition levels will have some negative impact in the near future," said Ankita Somani, analyst with Angel Broking. An attrition rate of under 15 percent, which Infosys reported some two years ago, would not cause concern, she added.
Infosys on Tuesday forecast sales to grow between 7 and 9 percent this fiscal year, in line with expectations, helped by an anticipated increase in U.S. and European clients. Last fiscal year, revenue grew 11.5 percent.
Infosys also said it had added 50 new clients in the March quarter, including Chinese-owned Swedish automaker Volvo Car Corp, taking its total tally to 890. At the end of the previous quarter, Infosys had a total of 888 clients.
(The story corrects 5th paragraph to say attrition rate annualised at 18.7 percent)
(Writing by Sumeet Chatterjee; Editing by Miral Fahmy and Tony Munroe)